Doing Business in Texas: Business Entities
The sole proprietorship is certainly the easiest and most unencumbered of business models. It is not a registered business entity but merely an individual doing business in their personal capacity. There is no state registration, state filings, nor any obligation to pay the annual state Franchise Tax which are considerable pros of the sole proprietorship structure. The major downside is not having limited liability between the business assets and personal assets, because in the case of a sole proprietorship they are all personal assets. In regards to taxation, the sole proprietorship is similar to a partnership or an LLC in that it is a pass through entity meaning any income you have from the business will be reported on your personal 1040 not as the business’s income.
While the state does not have a general business license you must obtain as a sole proprietorship, some counties and cities may require a license to conduct business or occupy a commercial location. The best replace to find information on such license requirements is to find your local chamber of commerce who can help guide you through the local licensing requirements. The state may require an occupational license or tax for certain industries and occupations. Some occupations such as cosmetologist, barber, property tax consultant all require a state license. Search the Texas Department of Licensing and Registration for more information about occupation taxes or licenses in your industry.
A partnership is an association of two or more persons who agree to conduct business together as owners for profit. Persons are not limited to individuals but can include corporations, LLCs, or other partnerships. Partnerships do not enjoy limited liability like corporations and LLCs. Both partners are agents of the partnership and jointly and severally liable for any obligations of the partnership.
There are forms of partnerships recognized by Texas, the general partnership and the limited partnership. The general partnership is what we generally think of when a partnership is mentioned, it is two or more parties collaborating as owners to conduct business together. The general partnership is similar to the sole proprietorship in that it does not have limited liability and does not require registration with the state.
The limited partnership requires at least one general partner and one limited partner. The general partner is the primary partner who operates the partnership/business and is also individually liable for obligations of the partnership. The limited partner does not have the power to govern the partnership and is not individually liable for the obligations of the partnership.
Texas does require state registration of a limited partnership with the Secretary of State. The limited partnership’s name must include “Limited Partnership”, “Limited”, or some abbreviation thereof. The limited partnership must also maintain a registered office and agent within the state. Partnerships are not taxed on their company income by either the state or the IRS. Although the limited partnership is liable for the Texas franchise tax. Partnerships are considered pass-through entities, where the owners are taxed individually on their share of the company income.
Limited Liability Company (LLC)
The limited liability company is one of the most popular business entities in Texas and across the country. It is easy and flexible for small businesses making it a top choice. An LLC may consist of one or more persons, called members. Similar to the partnership, the members may be individual people, corporations, partnerships, or even other LLCs. The LLC must be registered with the Secretary of State and have a registered office and agent within the state. The members of an LLC enjoy limited liability and are not subject to the obligations of the LLC. An LLC may be governed by the members or by a manager, who may also be a member. Much of the internal governance of an LLC is left up to the members to decide, unlike the sometimes onerous requirements of a corporation. This internal flexibility attracts small businesses to an LLC structure as it frees up time from internal governance and state compliance to focus on growing the business. Foreign LLCs (LLCs formed and registered in other states) are required to register with the Secretary of State before transacting any business in the state.
LLCs are subject to the franchise tax in Texas and require annual filings, the Public Information Report, regardless of whether any amount is actually owed. The LLC is a pass through entity in regards to income taxes. While Texas does not impose any income tax on residents or businesses the IRS will tax the income passed to members by distributions or allocations. Any income that the LLC receives and is distributed or allocated must be reported on the member’s individual 1040 each year.
A corporation is owned by shareholders, any number of shareholders is allowed in Texas. The corporation is subject to registration and annual filings with the Secretary of State. Compliance with state and federal requirements are very important for a corporation and there are many statutory rules for governance. The corporation will need to have a board of directors, shareholders, and bylaws. Any special provisions including classes of shares, cumulative voting rights, liability of directors, or written shareholder consents must be stated in the certificate of formation and the bylaws. The bylaws will need to state many of the statutory requirements such as annual meetings, notice to shareholders, and voting rights. Adherence to these requirements are sometimes costly but more importantly can open the company and the board of directors to personal liability. The shareholders must vote or consent to approve certain corporate actions such as mergers, amendments to the Certificate, the sale of all, or substantially all the property and assets of the corporation, and dissolution.
Corporate shareholders are not liable for corporate obligations. The board of directors may or may not be personally liable depending on the bylaws/certificate of formation. Both the Board and shareholders may become personally liable for corporate obligations if the company failed to maintain formal corporate practices. Corporations in Texas are subject to the franchise tax and federal corporate income taxes. Shareholders and employees are also subject to federal income tax on their share of the profits. This double taxation is one of the primary disadvantages for corporations to LLCs.
A foreign entity is any person or entity that is not originally registered in Texas. Any foreign entity (LLC, Corporation, Limited Partnership) must be registered with the Secretary of State to transact business in the State of Texas. This will require a registered office and registered agent by maintained by the entity. Registering with the Secretary of State will allow the entity to operate legally, to sue within the State, and to maintain its limited liability.
Business entities in Texas are very straightforward and provide many benefits over many other states. The key points to research as you consider doing business in Texas are: the business registration requirements, business tax responsibilities, and any applicable licenses. For more information about doing business in Texas and what business entity might be right for you, call Reidel Law Firm at (832)510-3292 or use the form below to schedule your free legal consultation.